Avid
Tech 2Q
| Avid
Tech 2Q
|
| (FOOL
CONFERENCE
CALL
SYNOPSIS)* By Debora Tidwell (MF Debit) Avid Technology Inc <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AVID)") else Response.Write("(NASDAQ: AVID)") end if %> UNION CITY, Ca., July 30, 1996/FOOLWIRE/ --- Avid Technology reported Q2 results after the market close yesterday. The company reported a loss of -$0.17 per share, which was $0.02 per share better than analyst estimates of a -$0.19 per share loss.
The company indicated that they have seen a number of hopeful signs and a number of things that they are encouraged about. The first was that revenue started growing again. Revenues increased 18.5% sequentially compared to Q1 1996, which reverses the sequential decline from the preceeding two quarters. Gross margins also increased modestly, growing to 45.5% from 43% in Q1 1996.
Revenues and gross margins benefitted from a number of factors. One is that the company had a full quarter of sales of the PCI version of Media Composer, their largest product line. Also, the MC Express product line was released in late May. This is a product for both Macintosh and Windows NT. It is at the lower end of Avid's product line and has been getting extremely positive acceptance out in the marketplace, especially from corporate and institutional customers. Also, the PCI version of DigiDesign Pro Tools 3 product was released in late May and is shipping in volume today. So, overall they had better news in this earnings release both in terms of revenues and margins.
They also came in on track on operating expenses. Last quarter they said they expected Q2 expenses to be equal to Q1 expenses plus the NAD expense which they incurred this quarter. The NAD expense approximates $4 million for the quarter. They actually came in about $1.75 million under that target, so overall they also had better news on operating expenses.
They also indicated last quarter that their highest priorities as a company was to address the balance sheet and cash flow. They see encouraging signs in Q2 on both fronts. They generated cash of $3.7 million in Q2 compared to a burn-rate of $27.5 million in Q1 1996 and another $45.5 million in cash that they consumed in the second half of 1995. The biggest piece of that improvement came in their receivables, which actually declined by about $4.8 million from Q1 to Q2. This happened even in the face of an 18.5% increase in revenue so they are fairly encouraged by that development. As a result, Days Sales Outstanding dropped dramatically to 72 days from 90 days at the end of Q1. DSOs were down in every part of the world with the biggest improvements in Asia and Europe.
INVENTORY AND FIXED ASSETS
They also saw some inventory decline -- about $4.7 million from $70.1 million in Q1 1996 to $65.4 million this quarter. Turns improved from 3.0 in Q1 to 3.6. That improvement included especially good improvement in stock turns -- they reduced their materials flow from vendors like Pinnacle and True Vision. They did not see as much improvement this quarter in spares and consignments as they would have liked and they are aggressively working that right now. They expect to see further improvement in the inventory column in coming quarters. Overall, like the income statement, this earnings release reflects better news on the balance sheet and in cash.
Gross fixed asset additions were about $6.4 million but that was largely offset by $4.8 million in depreciation and $1.4 million of disposal of excess access. So net fixed assets increased about $200,000 quarter to quarter. About 40% of the $6.4 million went into the company's field operation, largely to introduce the PTI and SGI products that are coming out. Engineering operations was another 37%. IS was 15% and the remaining 9% was spread through the rest of the company. The IS portion related to their continuing investment in their SAP management information systems as well as an increased investment in the networking infrastructure to tie their offices together around the world.
REVENUES AND GROSS MARGINS
Revenues were up throughout the world. All major regions grew over the first quarter results. Europe, in particular, was strong. North America accounted for 48% of total revenues and international operations was 52%. This compares to a 50-50 split in Q1 1996 and a 56% North America and 44% international split in Q2 1995.
DigiDesign grew over the prior two quarters, aided by the introduction in late May of the PCI Pro Tools family. The greatest revenue strength, however, was in editing products including primarily the Media Composer family. The newly released MC Express also got off to a good start. Relatively weaker performance was realized by the FX and broadcast products.
They recognized revenues from three server installations including two of the original beta sites. These server revenues totalled approximately $2.4 million in the quarter. Revenue to be recognized in future quarters for server installations is now down to approximately $6 million. As they mentioned in previous quarters, that revenue will carry very little gross margin, if any.
The book-to-bill was positive as the company continued to build backlog as it had in Q1. Units counted for 44% of revenue. This compares favorably with the 50-51% shipped in the 3rd month of the previous two quarters but is still not acceptable.
Gross margins improved to 45.5% from 43% in Q1 1996, although this is still down from the 52.1% from Q2 1995. As mentioned last quarter, the year-to-year comparisons will be influenced by much higher 1996 customer service allocations to cost of sales and higher facilities and IS charges to manufacturing overhead. They estimate this to adversely affect the margins by around 2%. Other factors impacting the Q2 margins compared to Q2 margins of 1995 were: the higher discounting and promotions on the NAD business this year, the increase of amortization of the capitalized software, server recognition which has very little gross margin associated with it, and the under-absorption of manufacturing overhead.
EXPENSES
In terms of operating expenses, they were generally in line with what the company projected last quarter. Q2 expenses were actually $1.7 million less than the Q1 plus the NAD expenses -- better than planned. R&D expenses declined just under $1 million compared to Q1 which reflects the headcount reductions that they did in their Q1 restructuring.
The company capitalized $778,000 of software development in Q2, compared to $610,000 in Q1. This was mostly related to PCI and Spectrum development. As they amortized $750,000 in the quarter, the net effect was essentially a wash in terms of the P&L.
Marketing and selling increased $2.7 million compared to Q1, reflecting the NAD expense. G&A increased $583,000 due principally to certain recruiting and relocation expenses as well as to general accruals. Headcount at June 30th was 1,515 compared to 1,519 at March 31. This resulted in a $5.4 million pre-tax loss and a $3.7 million net loss or a loss of $0.17 per share.
The bad debt reserve was reduced to $4.7 million or about 5.1% of gross accounts receivable. This is a reduction both in terms of the dollar and percentage amount compared to the prior quarter. The company believes that the reserve reduction reflects the improved aging in their receivables portfolio and also reflects approximately $3.7 million of bad debt write-offs that they took in Q2.
PLANS AND EXPECTATIONS GOING FORWARD
In Q3 and beyond they plan to continue their pressure on the balance sheet and to reach for cash flow improvements. They think there are more gains that can be made with respect to receivables, but their focus is really shifting heavily to inventory reduction.
They are also starting to work intensively on improving their profitability. They are maintaining a tight control of operating expenses and looking for opportunities to reduce costs and expenses. They are trying to apply more firepower to improving their gross margins. They will be releasing their SGI-based products in Q3, which represent a much higher software content from their standpoint. Also, they will get a full quarter of experience with the Pro Tools PCI shipments and expect to work with vendors and designers to achieve cost reductions on existing hardware over time.
In addition, the P&L will benefit somewhat if they are successful in getting the inventory reductions they are looking for because they will have fewer charges for inventory obsolescence. They feel that the key for them overall, in the short run, is to ratchet up significantly the improvements they are making in operating efficiency to reduce the number of defects in their processes and shorten their cycle times. In doing that, they feel they need to continue to maintain their focus on the customers and reduction of defects will mean better quality as their customers see it and better customer service. In spite of the dramatic improvements they made in response time this year, they feel they need to improve that further and make their new product releases solid and predictable in the future.
They believe that they continue to be the technology leader in digital media and are convinced that there is a lot of room left for growth in their marketplaces. To exploit that they feel they need to invest in their technology innovation and they intend to continue to do that, but the only way to afford that investment is to improve cash flow and profitability. They think everyone int he company understands that now and they are going to stay focused on that effort. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
Copyright 1996,
The Motley Fool |